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Companies Expand Offshore Cash Hoards

Untaxed offshore holdings grew by $183 billion over last year.

The largest U.S.-based companies expanded their untaxed offshore stockpiles by $183 billion in the past year, increasing such holdings by 14.4 percent, according to data compiled by Bloomberg.

Microsoft Corp., Apple Inc. and Google Inc. each added to their non-U.S. holdings by more than 34 percent as they reaped the benefits of past maneuvers to earn and park profits in low-tax countries. Combined, those three companies alone plan to keep $134.5 billion outside the U.S. government’s reach, more than double the $59.3 billion they held two years earlier.

The build-up of offshore profits -- totaling $1.46 trillion for the 83 companies examined -- is increasing because of incentives in the U.S. tax code for booking profits offshore and leaving them there. The stockpiles complicate attempts to overhaul the tax system as lawmakers look for ways to bring the money home and discourage profit shifting.

“The corporate system is broken and it’s broken primarily because of international,” said Edward Kleinbard, a tax law professor at the University of Southern California.

The ability to defer U.S. taxes until profits are brought home, the ease of shifting profits to low-tax countries and the world’s highest statutory corporate rate have all contributed to the growing stockpiles outside the U.S.

A report last year by analysts at JPMorgan Chase & Co. estimated that all U.S.-based companies had $1.7 trillion in accumulated offshore profits. In the data compiled by Bloomberg, 83 companies had about 75 percent of last year’s total, which suggests that the total for all companies now exceeds $1.9 trillion.

General Electric Co. again leads all U.S. companies with $108 billion held offshore, up from $102 billion a year earlier. Pfizer Inc. is second with $73 billion, followed by Microsoft, Merck & Co., Johnson & Johnson and International Business Machines Corp. The data comes from companies’ annual regulatory filings.

Eleven companies, including Apple, Cisco Systems Inc. and Citigroup Inc., have at least $40 billion in profits reinvested overseas, up from six companies that had crossed that mark last year and three the year before that.

The data compiled by Bloomberg examined 83 U.S.-based companies that each reported holding more than $4 billion in earnings outside the country indefinitely in one of the past two years.

Foreign Parents

It excluded companies such as Eaton Corp. Plc that now have foreign parents, and it also excluded United Technologies Corp., which disclosed a $22 billion balance this year and hadn’t reported the numbers before then.

The analysis relies on the most recent filings for the companies. Those with fiscal years that end Dec. 31 filed their 10-Ks over the past few weeks.

Apple, whose stock has fallen 38.7 percent from its Sept. 19 closing high of $702.10, has been under pressure to return cash to investors in the form a dividend or buyback. Chief Executive Officer Tim Cook has said the money isn’t burning a hole in the company’s pockets and that it’s considering different strategies to reward investors with a new payout.

A reason for the overseas cash growth can be linked in part to Apple’s performance. Sales in Asia, Europe and Australia rose 43.7 percent to $80.2 billion in fiscal 2012. Unlike most other U.S.-based companies, Apple has already taken accounting charges for eventual taxes on some of its unrepatriated foreign holdings and reports an associated deferred tax liability of $14.7 billion.

The company’s permanently reinvested overseas earnings were $40.4 billion while its foreign cash holdings were $82.6 billion, as of Sept. 29, 2012.

Steve Dowling, a spokesman for Apple, declined to comment.

The Securities and Exchange Commission has asked some companies, including Google, to assert that they have enough liquidity in the U.S. to justify their contention that the offshore money will stay overseas indefinitely.

Google wrote in its annual filing that $31.4 billion, or 65.3 percent, of its liquid holdings were outside the U.S.

“Our current plans do not demonstrate a need to repatriate them to fund our U.S. operations,” the filing said.

Niki Fenwick, a spokeswoman for Google, declined to comment.

Twelve of the 83 companies in the analysis reduced their offshore holdings from the previous year’s level, including Exxon Mobil Corp., Las Vegas Sands Corp. and General Motors Co.

Vegas Sands

Las Vegas Sands in 2012, according to its filing, repatriated $1.37 billion tax-free because it had enough foreign tax credits. The company said it would consider future foreign earnings not to be indefinitely reinvested, and its total accumulated earnings declined to $4.3 billion from $5.6 billion the year before.

The U.S. operates what is known as a worldwide tax system, which means the country applies its 35 percent corporate tax rate to profits that U.S.-based companies earn around the world. Most other industrialized nations impose minimal taxes, if any, on their companies’ foreign earnings.

U.S. companies receive foreign tax credits for payments to other countries, meaning that they can bring home previously taxed earnings with little residual tax owed to the U.S. They also can defer the U.S. tax until they bring the profits home.

“If you lowered the corporate tax rate, some of these problems, they don’t go away, but they’re reduced,” said Rob Atkinson, president of the Information Technology and Innovation Foundation, a Washington-based group that promotes policies favoring technological innovation. The group’s board includes executives from Microsoft, Apple, Cisco and Intel Corp.

In their annual regulatory filings, companies are required to report foreign profits that haven’t been repatriated and for which they haven’t provided for U.S. taxes.

The balances aren’t necessarily held in cash and may never realistically be subject to U.S. taxes, particularly if invested in physical assets in high-taxed foreign countries, said Susan Morse, a tax law professor at the University of California, Hastings.

“In many cases, it really is permanently reinvested and it’s not an earnings management game,” she said.

The incentive to accumulate overseas profits in cash is acute for technology and pharmaceutical companies that generate income from intangible assets such as patents. They can sell the patents to their foreign subsidiaries and then shift them to low-tax jurisdictions and book the profits there.

Intangible Income

“They’re using the law to their advantage, as all companies do,” Atkinson said. “And it’s easier to do that with intangible income.”

That pattern is evident from the filings of the minority of companies that disclose how much they would have to pay if they brought their offshore profits home.

Microsoft, for example, reported that it would owe $19.4 billion if it repatriated its $60.8 billion in offshore holdings. That 31.9 percent rate indicates that Microsoft has paid as little as 3.1 percent in foreign taxes, or somewhat more if the $19.4 billion includes state taxes and foreign withholding taxes.

In testimony before a Senate subcommittee last year, Bill Sample, Microsoft’s corporate vice president for worldwide tax, said the U.S. tax system is “outdated,” uncompetitive and provides disincentives for U.S. investment.

“Microsoft’s tax results follow from its business, which is fundamentally a global business that requires us to operate in foreign markets in order to compete and grow,” he said. “In conducting our business at home and abroad, we abide by U.S. and foreign tax laws as written.”

Citigroup reported that it would owe $11.5 billion if it repatriated its $42.6 billion, suggesting a foreign tax rate as low as 8 percent.

“More companies know how to do it,” said Kleinbard, a former chief of staff of the congressional Joint Committee on Taxation who said international tax-avoidance techniques are spreading. “They’ve learned the technologies from the innovative leaders, the tax technology leaders.”

U.S. lawmakers are examining changes to international taxation as part of a tax-code rewrite that would have to address the built-up earnings in a transition to a new system.

Senators Ron Wyden, an Oregon Democrat, and Rob Portman, an Ohio Republican, said last month that they saw room for an international system that would lower the U.S. tax rate, let companies bring home new profits mostly tax-free and limit companies’ ability to move profits out of the U.S.

That would mirror the proposals offered by Senator Mike Enzi, a Wyoming Republican, and Representative Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee.

Camp’s proposal would impose a 5.25 percent tax on the accumulated earnings, whether repatriated or not, payable over eight years. That plan, released in 2011, will eventually be part of a tax code overhaul that Camp plans to push through his committee this year. Meanwhile, the offshore stockpiles keep expanding.

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